OCBC CREDIT RESEARCH Special Interest Commentary Wednesday, September 16, 2020 - OCBC Bank

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OCBC CREDIT RESEARCH Special Interest Commentary Wednesday, September 16, 2020 - OCBC Bank
OCBC CREDIT RESEARCH
Special Interest Commentary
Wednesday, September 16, 2020

 Ticker:
 OUECT
                       OUE Commercial REIT (“OUE-CT”)
                      OCBC Credit Research does not cover OUE-CT. We present this paper as a special interest
 Seow Zhi Qi, CFA
                      commentary
 +65 6530 7348
 ZhiQiSeow@ocbc.com
                      Key Considerations

                          Acquisition driven growth: Since IPO, OUE-CT has grown through asset injection from its Sponsor,
                           OUE Limited (“OUE”, Issuer Profile: Neutral (5)) and the combination with OUE Hospitality Trust
                           (“OUE-HT”). The addition of One Raffles Place and OUE Downtown Office from its Sponsor has
                           brought total assets to ~SGD4.6bn as at 30 Jun 2019 from ~SGD1.7bn at IPO in 2014. Post-
                           combination with OUE-HT, OUE-CT’s total assets increased to SGD6.9bn as at 31 March 2020.
                           While the strategy of OUE-CT comprises acquiring assets from Sponsor and sourcing third-party
                           acquisitions on its own, we expect OUE-CT to continue to purchase assets from its Sponsor given
                           the track record.

                          Benefit from rental support and minimum rent from Sponsor: OUE-CT is receiving rental support
                           for OUE Downtown Office. Specifically, OUE will provide rental support of up to SGD60mn in total
                           or for a period from acquisition date (1 November 2018) up to 1 November 2023 (whichever is
                           earlier). Given SGD26.0mn of which has already been utilized and our base case assumption is that
                           OUE-CT will continue to benefit from the rental support, we estimate that this support will last till
                           2Q/3Q2022. In 2Q2020, rental support OUE-CT received was SGD5.4mn (+28.5%y/y). Without
                           rental support, total return before tax is estimated to fall by 18.8%y/y. OUE-CT also receives
                           minimum rent of SGD67.5mn p.a. for its hospitality assets from its Sponsor, the master lessor. With
                           international borders still closed for leisure travel, we expect OUE-CT to continue to benefit from
                           the minimum rent. Cumulatively, monies from OUE in 2Q2020 were SGD22.3mn (~32% of OUE-CT’s
                           adjusted total revenue). Overall, we think these highlight OUE-CT’s reliance on OUE especially in
                           tough times.

                          At risk of asset revaluation losses: We think OUE-CT runs the risk of its properties getting revalued
                           lower in the near term due to the poor economic outlook impacting occupancy rates and rent rates
                           or room rates for its hotel properties. OUE-CT’s aggregate leverage would be negatively impacted
                           because the denominator would become smaller as a result of a downward revaluation. Based on
                           figures as at 30 June 2020, a 5% decline in asset valuation would bring about a 2.1ppt increase in
                           aggregate leverage to 42.2% from 40.1% and a 10% decline would raise aggregate leverage to
                           44.6%, below the regulatory limit for aggregate leverage of 50% (if EBITDA/Interest as prescribed
                           by MAS is 2.5x or better). Management has estimated that asset values would need to correct by
                           ~20% before regulatory limit of 50% is breached.

                         Over 50% of its investment properties have been pledged: OUE-CT’s secured borrowings of
                          SGD1.5bn are secured by investment properties with a total carrying amount of SGD3.5bn, leaving
                          OUE-CT with 48.6% of its total investment properties unencumbered (i.e. SGD3.3bn out of
                          SGD6.8bn). We think One Raffles Place (valued at SGD1,552mn at 31 December 2019), OUE
                          Downtown Office (SGD912mn) and Crowne Plaza Changi Airport (SGD497mn) remain
                          unencumbered. In the midst of COVID-19, we think the valuation of hotel properties could be at risk
                          but expect valuation of One Raffles Place and OUE Downtown Office to be relatively more stable.
                          While OUE-CT still has assets that it can pledge to banks for loans, the proportion of unencumbered
                          assets is low relative to the other S-REITs (~85% on average among REITs we officially cover).

                         Manageable credit metrics in the near term: As at 30 June 2020, aggregate leverage was 40.1%.
                          EBITDA/Interest based on our calculation is 2.1x, and better at 2.4x if we were to include rental
                          support into EBITDA. EBITDA/Interest as prescribed by MAS is 2.8x for OUE-CT. Given how interest
                          rates have come down, we do not expect debt cost to increase over time for OUE-CT from the
                          current rate of 3.1% p.a. OUE-CT has SGD64.9mn of cash on hand versus SGD576.3mn of debt

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OCBC CREDIT RESEARCH
Special Interest Commentary
Wednesday, September 16, 2020

                          coming due in the short term. We think SGD426.3mn of which (a secured SGD loan) will be rolled
                          over. This would leave OUE-CT with SGD150.0mn of OUECT 3.03% ‘20s to refinance and ~SGD90mn
                          of capex for rebranding Mandarin Orchard Singapore commencing in 2Q2020. Management has
                          also shared that maturing debt will be refinanced ahead of maturity and it has sufficient liquidity to
                          meet its operational and financial commitments with available credit facilities to tap on where
                          necessary.

                      I) Company Background

                      OUE Commercial REIT (“OUE-CT”) is a REIT that invests in income-producing real estate used primarily
                      for commercial (e.g. office and retail) and hospitality. OUE-CT is listed on the SGX-ST with a market cap is
                      SGD2.0bn as at 18 August 2020, with total assets of SGD6.9bn as at 30 June 2020. OUE-CT has a portfolio
                      of seven properties across Singapore and Shanghai, China.

                      Of the seven assets, four are Grade A office properties. They are OUE Bayfront, 67.95% interest in One
                      Raffles Place, office components of OUE Downtown and 91.2% strata interest in Lippo Plaza. The first
                      three are located in Singapore while Lippo Plaza is located in Shanghai. OUE-CT also holds two hotels
                      and a retail property. They are 1,077-room Mandarin Orchard Singapore in Singapore’s Orchard Road
                      shopping belt, Mandarin Gallery (retail property) which is situated within Mandarin Orchard and the
                      563-room Crowne Plaza Changi Airport at Singapore’s Changi Airport. These assets were brought into
                      the OUE-CT structure following the combination with OUE Hospitality Trust (“OUE-HT”).

                      OUE-CT is managed by OUE Commercial REIT Management Pte. Ltd, a wholly owned subsidiary of OUE
                      Limited (“OUE”) who is the Sponsor. We hold OUE at Neutral (5) Issuer Profile as of writing. OUE is a
                      diversified real estate owner, developer and operator with a real estate portfolio located in Asia and the
                      U.S. OUE has a ~47.7% stake in OUE-CT as at 31 March 2020 and consolidates OUE-CT results.

                      OUE-CT has the right of first refusal (“ROFR”) over the Sponsor’s income-producing commercial,
                      hospitality and/ or integrated development properties.

                      At IPO in 2014, OUE-CT had an initial portfolio of just two assets – OUE Bayfront and Lippo Plaza.
                      Subsequently, the REIT has purchased new assets, thus far all from its Sponsor. These include a 67.95%-
                      interest in One Raffles Place (on 8 October 2015) and office components of OUE Downtown, both
                      located in Singapore. On 4 September 2019, OUE-CT completed the combination with OUE-HT, which
                      was similarly sponsored by OUE, though recorded as an associated company by the Sponsor.

                      OUE-HT, now an unlisted subtrust was once listed on the SGX-ST in 2013 with an initial portfolio of two
                      properties, Mandarin Orchard and Mandarin Gallery. OUE-HT then acquired Crowne Plaza Changi
                      Airport and its future extension on an adjacent site in June 2016 from a wholly-owned subsidiary of
                      OUE, its Sponsor for SGD495mn (total acquisition cost was ~SGD506mn). The property is master leased
                      to OUE till 27 May 2028, with an option for OUE to renew for two consecutive terms of five years each.
                      OUE will also provide rental income support for 3 years (which we believe to have ended on 1 August
                      2019) or totaling SGD7.5mn p.a., whichever is earlier.

                      Post the combination, OUE-CT has declined the offer to acquire Oakwood Premier OUE Singapore, a 268
                      room serviced residences which occupy the 7th to 32nd storey of OUE Downtown for SGD289mn under
                      ROFR. In July 2020, OUE-CT has also declined the offer to acquire USA Bank Tower, Los Angeles from its
                      Sponsor.

                      The issuer of OUECT 3.03% 20s and OUECT 4.00% 25s are OUE CT Treasury Pte Ltd. It is a wholly owned
                      subsidiary of OUE-CT and its principal activities are the provision of financial services for and on behalf of
                      OUE-CT. The bonds issued by OUE CT Treasury Pte Ltd are guaranteed by OUE-CT.

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                      II) Ownership and Management

                      OUE, the Sponsor is the largest unitholder with a 47.68% deemed interest in OUE-CT. Followed by the
                      Tangs, Gordon and Celine Tang who has a deemed interest of 11.37% and 6.55% respectively. As at 9
                      March 2020, ~35.81% of OUE-CT’s units was held in the hands of the public.

                      Figure 1: Major Unitholders as at 9 March 2020

                                          Unitholder                           Shares                 Deemed interest
                                          OUE Limited                       2,570,857,910                47.68%
                                  Tang Gordon (Tang Yigang)                  612,784,240                 11.37%
                                  Celine Tang (Chen Huaidan)                 353,121,062                  6.55%
                                  Janet Yeo (Yang Chanzhen)                  352,357,703                  6.54%
                        Source: Annual Report

                      Mr Lee Yi Shyan was appointed as the Chairman and Non-Independent Non-Executive Director of the
                      Board of OUE-CT Manager on 17 September 2019. Mr. Lee joined OUE as an executive adviser to the
                      chairman of OUE in January 2016. He is the chairman of OUE Lippo Healthcare Limited and OUE USA
                      Services Corp, and was the chairman and non-independent non-executive director of the board of
                      directors of OUE Hospitality REIT Management Pte. Ltd. Prior to joining OUE, Mr. Lee was Singapore’s
                      Senior Minister of State for the Ministry of National Development, Ministry of Trade & Industry and
                      Ministry of Manpower. Mr. Lee is currently an elected member of parliament in Singapore for the East
                      Coast group representation constituency.

                      Ms. Tan Shu Lin was appointed as Executive Director of the Board of OUE-CT Manager on 31 October
                      2013. As Chief Executive Officer, she is responsible for the strategic management, growth and operation
                      of OUE-CT. She was with Ascendas Funds Management Pte Ltd, the manager of Ascendas REIT, as head
                      of Singapore Portfolio and Capital Markets and Transactions. Ms. Tan holds a Bachelor of Arts (First Class
                      Honours) in Economics from the University of Portsmouth, United Kingdom, and is also a Chartered
                      Financial Analyst.

                      Mr. Lionel Chua is the Chief Financial Officer of the OUE-CT Manager and is responsible for OUE-CT’s
                      financial management functions. Mr. Chua was the Chief Financial Officer of OUE Hospitality REIT
                      Management Pte. Ltd. He also has extensive finance and treasury experience at the Keppel Group and
                      the CapitaLand Group handling financial reporting, financing, cash management, tax and other finance-
                      related matters. Mr. Chua holds a Bachelor of Accountancy (Merit) degree from Nanyang Technological
                      University, Singapore. He is a Chartered Accountant of Singapore, or CA (Singapore), with the Institute of
                      Singapore Chartered Accountants.

                      Mr. Philip Mah is the Vice President, Asset and Investment Management of the OUE-CT Manager. Mr.
                      Mah was an Investment Director at RGE Pte Ltd and was responsible for real estate investments in
                      China. Mr. Mah holds a Bachelor of Business Management (Cum Laude), majoring in Finance from the
                      Singapore Management University, and is also a Chartered Financial Analyst.

                      III) Portfolio Overview

                      OUE Bayfront
                      Located at Collyer Quay, Singapore, OUE Bayfront, comprises an 18-storey premium office building with
                      a rooftop restaurant and retail facilities, OUE Tower which is a conserved tower building currently
                      occupied by a fine dining restaurant and OUE Link, a link bridge with retail units. In total, OUE Bayfront
                      has a Net Lettable Area (NLA) of 37,144.9 square metre, with office and retail accounting for 94.7% and
                      5.3% respectively. OUE Bayfront is valued at SGD1,181mn as at 31 December 2019.

                      OUE Bayfront is on a 99-year leasehold title commencing 12 November 2007. As at 30 June 2020, the
                      property was fully occupied and continues to record positive rental reversion in 1Q2020 with committed

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                      rents above market rents. Nevertheless, we expect both occupancy and office rents to come under
                      pressure due to the business uncertainty posed by COVID-19 pandemic. OUE Bayfront has a Weighted
                      Average Lease Expiry (“WALE”) by NLA of 2.5 years and we will see 34.7% of leases by NLA expiring in
                      2021. The property generated SGD13.8mn revenue in 2Q2020 (21.5% of OUE-CT’s total revenue).

                      Lippo Plaza
                      Located in one of Shanghai’s core commercial districts, the property is valued at SGD571mn as at 31
                      December 2019. Comprising a 91.2% share of strata ownership in Lippo Plaza, it is a 36-storey Grade A
                      commercial building with a retail podium located at Huaihai Zhong Road, within the established
                      Huangpu business district in the Puxi area of downtown Shanghai.

                      Lippo Plaza has a 50-year land use right commencing 2 July 1994. As at 30 June 2020, the building’s
                      committed office occupancy declined 4.7ppt q/q to 81.1%. This could be due to the slowing office
                      leasing momentum in the Shanghai CBD Grade A market, amid worldwide business shutdowns. The
                      overall Grade A office occupancy was 85.4% for 2Q2020 in Shanghai, which was stable q/q. As of
                      2Q2020, the average passing rent was slightly lower (-0.62% q/q) at RMB9.64 per sqm per day. Putting
                      pressure on lease rates, Lippo Plaza will see 27.3% of its expiry leases by NLA expire in 2021 and a
                      further 42.2% expire in 2022. In a bid to cushion the business impact on the tenants, Lippo Plaza has
                      implemented support measures in line with relevant government advisories in Shanghai to all qualifying
                      tenants. In 2Q2020, Lippo Plaza generated total revenue of SGD6.4mn, contributing 9.9% to OUE-CT’s
                      total revenue.

                      One Raffles Place
                      The property consists of One Raffles Place Tower 1, a 62-storey Grade A office building, with a rooftop
                      restaurant and observation deck offering panoramic views of the city skyline, One Raffles Place Tower 2
                      and One Raffles Place Shopping Mall.

                      OUE-CT acquired a 67.95% interest in the property on 8 October 2015 from its Sponsor for
                      SGD1,145.8mn (total acquisition cost was ~SGD1,166mn) while the agreed value then was SGD1,715mn.
                      With an attributable NLA of 698,184 sqf (office 598,814 sqf and retail 99,370 sqf), the occupancy rate
                      was 91.4% (down 3.2ppt q/q) for the office component and 96.5% for retail (down 2.6ppt q/q) as at 30
                      June 2020. The property was valued at SGD1,862mn as at 31 December 2019 (based on OUB Centre
                      Ltd’s 81.54% interest in One Raffles Place, OUE-CT has an indirect 83.33% interest in OUB Centre Ltd
                      held via its wholly owned subsidiaries). One Raffles Place has a WALE by NLA of 2.1 years and bulk of the
                      expiry leases by NLA is in 2021 and 2022 (32.3% and 25.6% expiring in 2021 and 2022 respectively). In
                      2Q2020, One Raffles Place generated total revenue of SGD14.4mn, contributing 22.4% to OUE-CT’s total
                      revenue.

                      OUE Downtown Office
                      The office building includes the 35th to 46th storey of OUE Downtown Tower 1 and the 7th to 34th
                      storey of OUE Downtown Tower 2, offering ~530,000 sq ft of Grade A office space. It is part of the OUE
                      Downtown mixed-use development.

                      On 1 November 2018, OUE-CT purchased the office components of OUE Downtown for SGD908mn from
                      its Sponsor (total acquisition cost was ~SGD945mn). Property valuers had valued the property at
                      ~SGD936mn. As part of the transaction, OUE would also provide rental support of up to SGD60mn in
                      total or for a period of up to 1 November 2023, whichever is earlier. We think there are SGD34mn
                      remaining as of 30 June 2020. Despite business shutdowns due to measures to contain COVID-19
                      spread, OUE Downtown Office saw its office occupancy rate fall by 2.9ppt q/q to 91.7% as at 30 June
                      2020, below average market occupancy rate of 97.1%. Due to consecutive quarters of positive rental
                      reversions, OUE Downtown Office’s average passing rate has increased to SGD7.39 psf pm from SGD6.94
                      psf pm at acquisition in 3Q2018. In 2Q2020, OUE Downtown Office generated total revenue of
                      SGD9.4mn, contributing 14.6% to OUE-CT’s total revenue.

                      Mandarin Orchard Singapore

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                      Located in the heart of Orchard Road, Mandarin Orchard Singapore is a renowned upscale hotel
                      featuring 1,077 rooms, five food and beverage outlets and more than 30,000 sq ft of meeting and
                      function space, with strong brand recognition given its long history of operations in Singapore.

                      Mandarin Orchard Singapore is wholly-owned by OUE-HT.. It is under a master lease arrangement
                      entered into with OUE. The minimum rent is SGD45mn p.a. The hotel experienced a significant loss of
                      demand from tourist arrivals, business travels and social events as a result of strict travel restrictions to
                      contain COVID-19 spread, though there was replacement demand from people on self-isolation and
                      those affected by travel ban. Overall, the operating environment within the hospitality industry
                      remained weak in 2Q2020. As a consequence, Mandarin Orchard Singapore saw its 2Q2020 revenue per
                      available room (“RevPAR”) decline 79.5% y/y to SGD40mn (2Q2019: SGD196).

                      In a bid to capitalize on the uncertain business environment, OUE-CT announced in March 2020 that
                      Mandarin Orchard Singapore would be rebranded into Hilton Singapore Orchard with a capex of
                      SGD90mn (to be borne by OUE-CT) during this downtime. The refurbishment is expected to take place
                      from 2Q2020 and targeted to be re-launched in 2022.

                      Mandarin Gallery
                      The property is a four levels high-end retail mall situated along Orchard Road. The mall is complemented
                      by Mandarin Orchard Singapore, collectively providing an integrated hospitality and retail experience for
                      shoppers and hotel guests.

                      With the COVID-19 outbreak, Mandarin Gallery’s committed occupancy decreased by 3.4ppt q/q to
                      94.4% as at 30 June 2020, though average passing rent was higher (+2.04% q/q) at SGD22.47 psf pm
                      despite declines in foot traffic and tenant sales from April 2020 after stricter social distancing measures
                      being implemented.

                      Crowne Plaza Changi Airport
                      Managed by InterContinental Hotels Group, the property is a 563-room hotel situated near Changi
                      Airport. It is connected directly to Changi Airport Terminal 3 and via a pedestrian bridge from Terminal 3
                      to Jewel Changi Airport. The hotel is also located a short drive away from Changi Business Park and the
                      Singapore Expo.

                      Crowne Plaza Changi Airport is under master lease arrangement, where OUE is the master lessee. The
                      minimum rent is SGD22.5mn p.a. The hotel was valued at SGD497mn (SGD0.9mn/key) as at 31
                      December 2019. Due to the weak operating environment posed by COVID-19 pandemic, the hotel’s
                      2Q2020 RevPAR declined 56.2%y/y to SGD83 (2Q2019: SGD189).

                      Figure 2: OUE-CT’s Portfolio
                                                                          Attributable                            Valuation2
                                                                                                            1
                       Property            Leasehold Type & Tenure        NLA (sq ft)           Occupancy         (SGD’mn)
                       OUE Bayfront        Multi-tenanted; 86 years       Office: 378,692         100.0%            1,181
                                           (except OUE Link – 5           Retail: 21,132
                                           years)
                                                                                                                            3
                       One Raffles         Multi-tenanted;                Office: 598,814          91.4%             1862
                       Place               Tower 1 & 25% of mall:         Retail: 99,370
                                           806 years
                                           Tower 2 & 75% of mall: 62
                                           years
                       OUE Downtown        Multi-tenanted; 46 years       Office: 530,487          91.7%              912
                       Office
                       Lippo Plaza         Multi-tenanted; 24 years       Office: 361,010          81.1%             579.3
                                                                          Retail: 60,776
                       Mandarin Gallery    Multi-tenanted; 36 years       Retail: 126,283          94.4%              493
                       Mandarin            Master leased; 36 years        1,077 rooms               NA               1,228
                       Orchard                                                                                    (1.1mn/key)
                       Singapore
                       Crowne Plaza        Master leased; 63 years        563 rooms                  NA               497
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                          Changi Airport                                                                                 (0.9mn/key)
                      Source: Company
                      1
                        Committed occupancy as at 30 June 2020
                      2
                        Valuation as at 31 December 2019
                      3
                        based on OUB Centre Ltd’s 81.54% interest in One Raffles Place, OUE-CT has an indirect 83.33% interest in OUB
                      Centre Ltd held via its wholly owned subsidiaries

                          Figure 3: Portfolio Composition by Asset Value1         Figure 4: Portfolio Composition by Revenue1

                      Source: Company
                      1
                        as at 30 June 2020; asset values will only be revalued annually with the next valuation expected on 31 December 2020

                      IV) Business Analysis

                            Diversified REIT; most exposure to Office: OUE-CT has three business segments and generates most
                             of its revenue from Office (62.6%), followed by Hospitality (26.3%) then Retail (11.1%). No single
                             asset contributed more than 22.4% of revenue in 2Q2020. Across lessees, Hospitality made up
                             22.3% of OUE-CT’s revenue, followed by the banking, insurance and financial services sector at
                             20.1% and the retail (excluding F&B) sector at 10.5%. Occupancy rate at its office properties was
                             91.3% as at 30 June 2020, dragged by Lippo Plaza in Shanghai whose occupancy rate was 81.1%,
                             below the market average for office properties in Shanghai of 85.4%. In Singapore, OUE Bayfront is
                             100% occupied, while One Raffles Place and OUE Downtown Office are both at 91% handle when
                             the market average occupancy in Singapore core CBD office is 97.1%. As at 30 June 2020, expiring
                             leases at its office properties for 2020 was 11.1% of gross rental income, with the bulk coming from
                             OUE Downtown Office. Seemingly, OUE-CT has managed to renew some of these leases post 30
                             June 2020, bringing the expiring leases by gross rental income at the OUE Downtown Office down to
                             8.6% from 35.0%.

                            Growth via acquisition of properties from Sponsor: OUE-CT has grown since IPO through asset
                             injection from its Sponsor and the combination with OUE-HT. As at 31 March 2014, shortly after
                             IPO, OUE-CT was a REIT with ~SGD1.7bn total assets. The addition of One Raffles Place and OUE
                             Downtown Office from Sponsor has brought total assets to ~SGD4.6bn as at 30 Jun 2019. Post-
                             combination with OUE-HT, OUE-CT’s total assets was SGD6.9bn as at 31 March 2020. While the
                             strategy of OUE-CT comprises both acquiring assets from Sponsor as well as sourcing third-party
                             acquisitions on its own, we continue to expect OUE-CT to purchase assets from its Sponsor given
                             the track record.

                            Stable until recently: Excluding Hospitality assets which are on master lease and on a same store
                             basis (i.e. excluding OUE-HT which combined with OUE-CT in 3Q2019), overall revenue in 2Q2020
                             was down 15.3%y/y and 16.5%q/q (comparing 1Q2020 with 2Q2020) to SGD44.0mn. While the dip
                             in 2Q2020 performance of the properties was mainly due to provision for rental rebates to be
                             extended to qualifying tenants to cushion the impact of business disruption due to COVID-19, we
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                            note that in 1Q2020, overall revenue on a same store basis was down 4.7%y/y and up 0.7%q/q.
                            Broadly, as seen in Figure 6, there is no clear trend on the revenue front for these properties.
                            Looking ahead, office occupancy and rents are expected to remain under pressure. Therefore, we
                            think muted organic growth will persist.

                          Figure 5: Revenue by Property (SGD’mn)                    Figure 6: Revenue by Property (SGD’mn)

                      Source: Company

                           Rental support for OUE Downtown Office already one-third utilized: Rents at the property was
                            (~SGD7.00 psf pm) lower than average of peers (~SGD8.43 psf pm) when OUE-CT acquired it in 2018
                            from its sponsor. Therefore, OUE provided rental income top up if actual rental income falls below
                            the target rent. The rental support is capped at SGD60mn in total or for a period of up to 1
                            November 2023 (i.e. 4Q2023), whichever is earlier. Based on Figure 7, rental income top up was
                            utilized every year since acquisition. We estimate that SGD26.0mn of rental support has been
                            utilized, leaving a balance amount of SGD34.0mn. Given that occupancy rate at OUE Downtown
                            Office remains below the market average and the economic outlook is weak, we expect OUE
                            Downtown Office to continue to qualify for rental support and draw down on the full amount
                            before 1 November 2023. We estimate that the balance rental support will last OUE-CT for another
                            7 to 8 quarters (i.e. until 2Q/3Q2022). As at 2Q2020, average passing rent is SGD7.39 psf pm, ~20%
                            below the target rent of SGD9.25 psf pm. Therefore we think rental support running out is a
                            significant downside risk for OUE-CT as we do not expect OUE Downtown Office to be able to see a
                            cumulative ~20%+ increase in rents over the next 1.5 years given current market conditions.
                            Consequentially, total return before tax is estimated to fall by ~19%y/y.

                      Figure 7: OUE Downtown Office Target Rent vs Average Passing Rent
                                                                 Average Passing              Target Rent   Rental Support Top up
                                                                Rent (SGD psf pm)            (SGD psf pm)         (SGD’mn)
                          Nov & Dec 2018                               6.94                      8.90               ~2.56
                          2019                                         7.16                      9.10               ~14.45
                          Jan to Jun 2020                              7.31                      9.25               ~8.98
                          2021 to 2023                                   -                       9.40                 -
                          Total                                                                                     ~25.99
                      Source: Company
                      Note: Total NLA is 530,487 sq ft; assumes rental support top ups to full occupancy

                           Hospitality assets are master leased to Sponsor: The hotels OUE-CT hold via a sub-trust is leased to
                            the master lessee who will appoint the hotel manager to manage day-to-day operations and
                            marketing. Mandarin Orchard Singapore’s master lessee is OUE and the master lease agreement is
                            subject to a minimum rent of SGD45mn per year until July 2028 with an option to extend for
                            another 15 years. Crowne Plaza Changi Airport is master leased to OUE Airport Hotel Pte Ltd and
                            the minimum rent is SGD22.5mn per year until May 2028 with the option to extend for two
                            consecutive 5 year periods. OUE Airport Hotel Pte Ltd is a wholly owned subsidiary of OUE. Given
                            the COVID-19 pandemic which led to travelling restrictions, minimum rent is especially useful. In
                            2Q2020, OUE-CT received the full amount of minimum rent from OUE. We note that RevPAR has
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                            fallen significantly by 79.5%y/y to SGD40 for Mandarin Orchard Singapore and 56.2%y/y to SGD83
                            for Crowne Plaza Changi Airport. Assuming travelling remains curtained for the rest of 2020, our
                            worst case assumption is that revenue from the Hospitality segment for OUE-CT will fall to the
                            minimum rent amount i.e. SGD16.9mn per quarter. The worst case also alters the scenario to
                            counterparty risk for OUE-CT where whether OUE-CT will receive the minimum rent amount is
                            dependent on OUE’s ability to make the payment. We have OUE at Issuer Profile of Neutral (5) as of
                            writing.

                           Rebranding to Hilton Singapore Orchard: OUE-CT announced on 26 March 2020 that it is
                            rebranding Mandarin Orchard Singapore to Hilton Singapore Orchard, which would be the largest
                            Hilton hotel in the Asia-Pacific region when completed. Works commenced in 2Q2020 and is
                            expected to be completed in 2022. The capex required is ~SGD90mn. We note that downside
                            protection from the minimum rent embedded within the hotel master lease arrangement will
                            continue throughout the phased renovation and ramping-up period. OUE-CT expects a 10% return
                            on investment on a stabilized basis. It is still too early to say though when international travel would
                            resume, which would impact on when this stabilized return on investment can be achieved. In the
                            short term we do not expect material changes to the reopening of international borders in the near
                            term. Discussions between governments have been protracted while countries facing second waves
                            have re-imposed restrictions on mobility. The International Air Transport Association (“IATA”) in its
                            latest views dated 28 July 2020 expects that air travel will not recover to pre-COVID-19 levels until
                            2024.

                           Pipeline of assets at Sponsor: Sponsor, OUE, has Downtown Gallery, a ~150,000 sq ft shopping
                            space spread over six levels. It has a prominent 262 metre wide frontage. Downtown Gallery has
                            lease tenure of 46 years remaining and was valued at SGD270mn as at 31 December 2019. OUE-CT’s
                            debt headroom is ~SGD323mn and ~SGD653bn for the regulatory limit of aggregate leverage of 45%
                            and 50% respectively. While we think OUE-CT is theoretically able to fund an acquisition of the
                            properties via a mix of debt and equity, we do not expect these properties to be injected into OUE-
                            CT in the near term. That said, the possibility remains that should Sponsor be in need of cash,
                            pumping its assets into OUE-CT is a viable route, especially if OUE-CT’s balance sheet is able to
                            accommodate asset growth.

                      V) Financial Analysis

                           Acquisitions drive debt higher: The increase in debt from 3Q2015 to 4Q2015 was due to the
                            acquisition of One Raffles Place. That next increase in 4Q2018 was due to the acquisition of OUE
                            Downtown Office and the biggest jump in 2Q2019 was due to the combination with OUE-HT. Since
                            IPO, OUE-CT has not paid down much debt. Figure 9 depicts strong correlation between debt and
                            revenue over time. We think this suggests that growth in revenue has been largely fuelled more by
                            debt though OUE-CT had in late 2018 raised ~SGD588mn of equity. Given organic growth has been
                            somewhat muted, we think it would be difficult for OUE-CT to pay down its debt in the near term.
                            Therefore, we expect debt to fluctuate around current levels, with aggregate leverage of ~40%.

                          Figure 8: Debt and Net Debt over Time (SGD’mn)        Figure 9: Debt and Revenue over              Time
                                                                                (SGD’mn)

 Treasury Research & Strategy                                                                                               8
OCBC CREDIT RESEARCH
Special Interest Commentary
Wednesday, September 16, 2020

                      Source: Company

                         51% of its investment properties have been pledged: OUE-CT’s secured borrowings of SGD1.5bn
                          are secured by investment properties with a total carrying amount of SGD3.5bn, leaving OUE-CT
                          with 48.6% of its total investment properties unencumbered (i.e. SGD3.3bn out of SGD6.8bn). We
                          think One Raffles Place (valued at SGD1,552mn at 31 December 2019), OUE Downtown Office
                          (SGD912mn) and Crowne Plaza Changi Airport (SGD497mn) remain unencumbered. In the midst of
                          COVID-19, we think the valuation of hotel properties could be at risk but expect valuation of One
                          Raffles Place and OUE Downtown Office to be relatively more stable. While OUE-CT still has assets
                          that it can pledge to banks for loans, the proportion of unencumbered assets is low relative to the
                          other S-REITs. For the S-REITs under our official coverage, the average unencumbered assets are
                          90% for Office REITs, 88% for Retail REITs and 83% for Hospitality REITs.

                          At risk of asset revaluation losses: We think OUE-CT runs the risk of its properties getting revalued
                           lower in the near term due to the poor economic outlook impacting occupancy rates and room
                           rates for its hotel properties. OUE-CT’s aggregate leverage would be negatively impacted as well
                           because the denominator would become smaller as a result of a downward revaluation. Based on
                           figures as at 30 June 2020, a 5% decline in asset valuation would bring about a 2.1ppt increase in
                           aggregate leverage to 42.2% from 40.1% and a 10% decline would raise aggregate leverage to
                           44.6%, below the regulatory limit for aggregate leverage of 50% (if EBITDA/Interest as prescribed
                           by MAS is 2.5x or better). Management has estimated that asset values would need to correct by
                           ~20% before regulatory limit of 50% is breached.

                         Manageable credit metrics in the near term: As at 30 June 2020, aggregate leverage was 40.1%.
                          EBITDA/Interest based on our calculation is 2.1x, and better at 2.4x if we were to include rental
                          support into EBITDA. EBITDA/Interest as prescribed under MAS’ calculation is 2.8x for OUE-CT.
                          Given how interest rates have come down, we do not expect debt cost to increase over time for
                          OUE-CT from the current rate of 3.1% p.a. OUE-CT has SGD64.9mn of cash on hand versus
                          SGD576.3mn of debt coming due in the short term. We think SGD426.3mn of which (a secured SGD
                          loan) will be rolled, leaving OUE-CT with SGD150.0mn of debt to handle (i.e. OUECT 3.03% ‘20s due
                          in September 2020). OUE-CT has another SGD90mn for the Hilton capex. Management has shared
                          that these maturing debt will be refinanced ahead of maturity and it has sufficient liquidity to meet
                          its operational and financial commitments with available credit facilities to tap on where necessary.
                          OUE-CT has also retained SGD13.8mn of distribution (comprising tax-exempt income and capital
                          distribution) in 1H2020 to preserve financial flexibility. While we expect OUE-CT to be able to meet
                          its near term financing needs, we note that it has SGD796mn maturing in 2021 (~30% of total debt)
                          and SGD674mn maturing in 2022 (~25% of total debt). The term of debt for OUE-CT is somewhat
                          short at 1.9 years.

 Treasury Research & Strategy                                                                                           9
OCBC CREDIT RESEARCH
Special Interest Commentary
Wednesday, September 16, 2020

                        The Credit Research team would like to acknowledge and give due credit to the contributions of Zhou
                        Ziqi.

 Treasury Research & Strategy                                                                                       10
OCBC CREDIT RESEARCH
Special Interest Commentary
Wednesday, September 16, 2020

                                                            OUE Commercial REIT
      Table 1: Sum m ary Financials                                                   Figure 1: Revenue breakdow n by Segm ent - 1H2020
       Year Ended 31st Dec                         FY2018       FY2019     1H2020
       Incom e Statem ent (SGD'm n)                                                                          Hospitality
                                                                                                              26.3%                                  Retail
       Revenue                                      176.4       257.3       142.0                                                                    11.1%

       EBITDA                                       127.2       187.9       102.0
       EBIT                                         121.7       182.4       99.4
       Gross interest expense                        51.7        71.9       45.2
       Profit Before Tax                            150.4       150.7       65.5
       Net profit                                   117.5       118.7       56.1
       Balance Sheet (SGD'm n)
       Cash and bank deposits                        37.1        59.4       64.9
       Total assets                                4,571.1      6,888.2    6,913.4
                                                                                                                           Office
       Short term debt                                2.0       575.5       577.3                                          62.6%

       Gross debt                                  1,713.3      2,687.1    2,707.5
       Net debt                                    1,676.2      2,627.7    2,642.7
                                                                                                 Offi ce                   Hospita lity              Retail
       Shareholders' equity                        2,640.7      3,928.2    3,900.8
       Cash Flow (SGD'm n)
       CFO                                          132.7       160.9       116.9     Source: Company

       Capex                                          3.6        7.9         3.1
       Acquisitions                                 936.0        0.0         0.0      Figure 2: Revenue breakdow n by Property - 1H2020
       Disposals                                      0.0        0.0         0.0                             Crowne    Mandarin                Mandarin
                                                                                                          Plaza Changi Gallery                  Orchard
       Dividends                                     80.7       111.2       61.2             OUE             Airport    5.3%                   Singapore
                                                                                           Downtown           8.8%                               17.5%
       Interest paid                                 43.3        66.5       38.6            Office
                                                                                            14.6%
       Free Cash Flow (FCF)                         129.0       153.0       113.8
       Key Ratios
       EBITDA margin (%)                            72.11       73.01       71.80
       Net margin (%)                               66.61       46.15       39.48
       Gross debt to EBITDA (x)                     13.47       14.30       13.28
       Net debt to EBITDA (x)                       13.18       13.99       12.96
                                                                                                                                                         One Raffles
                                                                                            Lippo Plaza
       Gross Debt to Equity (x)                      0.65        0.68       0.69                9.9%
                                                                                                                     OUE                                   Places
                                                                                                                    Bayfront                               22.4%
       Net Debt to Equity (x)                        0.63        0.67       0.68                                     21.5%

       Gross debt/total asset (x)                    0.37        0.39       0.39           One Raffles Places                         OUE Bayfront

       Net debt/total asset (x)                      0.37        0.38       0.38           Lippo Plaza                                OUE Downtown Office

       Cash/current borrow ings (x)                 18.61        0.10       0.11           Crowne Plaza Changi Airport                Mandarin Gallery

       EBITDA/Total Interest (x)                     2.46        2.61       2.25           Mandarin Orchard Singapore

      Source: Company, OCBC estimates                                                 Source: Company

      Figure 3: Debt Maturity Profile                                                 Figure 4: Gross Debt to Equity (x)
      Am  ounts in (SGD'm n)
        (SGD'mn)                             As at 31/12/2019             % of debt
      900
                              792.0
      800 ount repayable in one year or less, or on dem and
      Am
      700                         644.0                                                                                      0.68                     0.69
       Secured                              0.0                             0.0%                0.65
              575.0
      600
       Unsecured                           210.9                            6.0%
      500
                                                    210.9
                                                      403.0                 6.0%
      400
      Am ount repayable after a year
      300
       Secured                                        0.0                   0.0%
      200                                                        130.0
       Unsecured                                   3334.2                  94.0%
                                                                           100.0
      100
                                                   3334.2                  94.0%
               FY2020        FY2021      FY2022        FY2023   FY2024     FY2025             FY2018                   FY2019                     1H2020
      Total                             As at 30 June 3545.2
                                                      2020                 100.0%                               Gross Debt to Equity (x)

      Source: Company                                                                 Source: Company, OCBC estimates

 Treasury Research & Strategy                                                                                                                                          11
OCBC CREDIT RESEARCH
Special Interest Commentary
Wednesday, September 16, 2020

  Explanation of Issuer Profile Rating / Issuer Profile Score

  Positive (“Pos”) – The issuer’s credit profile is either strong on an absolute basis, or expected to improve to a
  strong position over the next six months.

  Neutral (“N”) – The issuer’s credit profile is fair on an absolute basis, or expected to improve / deteriorate to a fair
  level over the next six months.

  Negative (“Neg”) – The issuer’s credit profile is either weaker or highly geared on an absolute basis, or expected
  to deteriorate to a weak or highly geared position over the next six months.

  To better differentiate relative credit quality of the issuers under our coverage, we have further sub-divided our
  Issuer Profile Ratings into a 7 point Issuer Profile Score scale.

  Please note that Bond Recommendations are dependent on a bond’s price, underlying risk free rates and
  an implied credit spread that reflects the strength of the issuer’s credit profile. Bond Recommendations
  may not be relied upon if one or more of these factors change.

  Explanation of Bond Recommendation

  Overweight (“OW”) – The bond represents better relative value compared to other bonds from the same issuer,
  or bonds of other issuers with similar tenor and comparable risk profile.

  Neutral (“N”) – The represents fair relative value compared to other bonds from the same issuer, or bonds of
  other issuers with similar tenor and comparable risk profile.

  Underweight (“UW”) – The represents weaker relative value compared to other bonds from the same issuer, or
  bonds of other issuers with similar tenor and comparable risk profile.

  Other

  Suspension – We may suspend our issuer rating and bond level recommendation on specific issuers from time
  to time when OCBC is engaged in other business activities with the issuer. Examples of such activities include
  acting as a joint lead manager or book runner in a new issue or as an agent in a consent solicitation exercise. We
  will resume our coverage once these activities are completed.

  Withdrawal (“WD”) – We may withdraw our issuer rating and bond level recommendation on specific issuers
  from time to time when corporate actions are announced but the outcome of these actions are highly uncertain.
  We will resume our coverage once there is sufficient clarity in our view on the impact of the proposed action.

 Treasury Research & Strategy                                                                                          12
OCBC CREDIT RESEARCH
Special Interest Commentary
Wednesday, September 16, 2020

 Treasury Research & Strategy
 Macro Research
 Selena Ling                           Tommy Xie Dongming                      Wellian Wiranto                          Terence Wu
 Head of Strategy & Research           Head of Greater China Research          Malaysia & Indonesia                    FX Strategist
 LingSSSelena@ocbc.com                 XieD@ocbc.com                           WellianWiranto@ocbc.com                 TerenceWu@ocbc.com

 Howie Lee                             Carie Li                                Dick Yu
 Thailand, Korea & Commodities         Hong Kong & Macau                       Hong Kong & Macau
 HowieLee@ocbc.com                     carierli@ocbcwh.com                     dicksnyu@ocbcwh.com

 Credit Research
 Andrew Wong                           Ezien Hoo                               Wong Hong Wei                           Seow Zhi Qi
 Credit Research Analyst               Credit Research Analyst                 Credit Research Analyst                 Credit Research Analyst
 WongVKAM@ocbc.com                     EzienHoo@ocbc.com                       WongHongWei@ocbc.com                    ZhiQiSeow@ocbc.com

Analyst Declaration
The analyst(s) who wrote this report and/or her or his respective connected persons did not hold financial interests in the above-mentioned issuer
or company as at the time of the publication of this report.

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  Treasury Research & Strategy                                                                                                                         13
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